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Macroeconomic Consequences of Outsourcing. An Analysis of Growth, Welfare and Product Variety

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Author Info

  • Groot, H.L.F. de

    (Tilburg University, Center for Economic Research)

Abstract

Outsourcing of non-core activities by firms is nowadays a common business strategy. This paper provides a theoretical framework for analyzing a firms’ incentive to follow such a strategy and its consequences for macroeconomic variables like growth and product variety. We divide production activities into core and non-core activities. Non-core activities can be performed within the firm or can be mediated by the market. We will derive conditions under which outsourcing will occur, and under which outsourcing will be socially desirable. These conditions do not necessarily coincide due to two externalities. Outsourcing may hence be a profitable strategy for firms, while it is socially suboptimal. Crucial parameters in the model are the relative scale of core versus non-core activities, traditional management costs, transaction costs and taste for variety of consumers. This paper suggests that declining transaction costs are a crucial factor in explaining the observed increase in outsourcing.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1998-43.

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Date of creation: 1998
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Handle: RePEc:dgr:kubcen:199843

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Related research

Keywords: outsourcing; endogenous growth; product variety; transaction costs; welfare;

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References

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  1. Antonio Ciccone & Kiminori Matsuyama, 1993. "Start-Up Costs and Pecuniary Externalities as Barriers to Economic Development," NBER Working Papers 4363, National Bureau of Economic Research, Inc.
  2. Feenstra, R.C. & Hanson, G.H., 1995. "Foreign Investment, Outsourcing and Relative Wages," Department of Economics 95-14, California Davis - Department of Economics.
  3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
  4. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July.
  5. Kiminori Matsuyama, 1995. "Complementarities and Cumulative Processes in Models of Monopolistic Competition," Journal of Economic Literature, American Economic Association, vol. 33(2), pages 701-729, June.
  6. Donald Siegel & Zvi Griliches, 1992. "Purchased Services, Outsourcing, Computers, and Productivity in Manufacturing," NBER Chapters, in: Output Measurement in the Service Sectors, pages 429-460 National Bureau of Economic Research, Inc.
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  9. Katharine G. Abraham & Susan K. Taylor, 1993. "Firms' Use of Outside Contractors: Theory and Evidence," NBER Working Papers 4468, National Bureau of Economic Research, Inc.
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  12. Kelly, Morgan, 1997. "The Dynamics of Smithian Growth," The Quarterly Journal of Economics, MIT Press, vol. 112(3), pages 939-64, August.
  13. Groot, H.L.F. de & Nahuis, R., 1997. "Optimal Product Variety, Scale Effects and Growth," Discussion Paper 1997-54, Tilburg University, Center for Economic Research.
  14. William T. Dickens & Lawrence F. Katz, 1987. "Interindustry Wage Differences and Industry Characteristics," NBER Working Papers 2014, National Bureau of Economic Research, Inc.
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  16. Audretsch, David B, 1995. "The Innovation, Unemployment and Competitiveness Challenge in Germany," CEPR Discussion Papers 1152, C.E.P.R. Discussion Papers.
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Citations

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Cited by:
  1. Bernd Görzig & Andreas Stephan, 2002. "Outsourcing and Firm-level Performance," Discussion Papers of DIW Berlin 309, DIW Berlin, German Institute for Economic Research.
  2. Marta Arespa, 2011. "Macroeconomics of extensive margins: a simple model," Working Papers XREAP2011-19, Xarxa de Referència en Economia Aplicada (XREAP), revised Nov 2011.
  3. Gamal Atallah, 2002. "Production Technology, Information Technology, and Vertical Integration under Asymmetric Information," CIRANO Working Papers 2002s-32, CIRANO.
  4. Hong, Junjie & CHIN, Anthony T.H., 2007. "Modeling the location choices of foreign investments in Chinese logistics industry," China Economic Review, Elsevier, vol. 18(4), pages 425-437.
  5. Nicholas Sim, 2004. "International production sharing and economic development: moving up the value-chain for a small-open economy," Applied Economics Letters, Taylor & Francis Journals, vol. 11(14), pages 885-889.
  6. Henk L.M. Kox, 2003. "Sources of structural growth in business services," Industrial Organization 0309004, EconWPA.
  7. Kong Weng Ho & Hian Teck Hoon, 2003. "Service Links and Wage Inequality," Departmental Working Papers wp0301, National University of Singapore, Department of Economics.

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